Poage Bankshares (PBSK) 10-Q 2014 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended March 31, 2014

Or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from ______________________ to___________________

Commission File Number 001-35295

Poage Bankshares, Inc.

(Exact Name of Registrant as Specified in Charter)

Maryland	45-3204393
(State of Other Jurisdiction	(I.R.S Employer
Of Incorporation	Identification Number)

1500 Carter Avenue, Ashland, KY 41101	41101
(Address of Principal Executive Officer)	(Zip Code)

606-324-7196

Registrant’s telephone number, including area code

Not Applicable

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	o
Non-accelerated filer	¨	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

As of May 5, 2014, 3,904,884 shares of the Registrant’s common stock, par value $.01 per share, were outstanding.

POAGE BANKSHARES, INC.

Form 10-Q Quarterly Report

Table of Contents

	PART I. FINANCIAL INFORMATION
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS – POAGE BANKSHARES, INC.	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS	26
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	32
ITEM 4.	CONTROLS AND PROCEDURES	32
	PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	33
ITEM 1A.	RISK FACTORS	33
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	33
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	33
ITEM 4.	MINE SAFETY DISCLOSURES
ITEM 5.	OTHER INFORMATION	33
ITEM 6.	EXHIBITS	33
SIGNATURES		34

PART I

ITEM 1.     FINANCIAL STATEMENTS

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2014			2013
	(in thousands)
ASSETS
Cash and due from financial institutions	$	16,745		$	6,684
Securities available for sale		92,801			86,062
Loans held for sale		364			307
Loans, net of allowance of $1,867 and $1,908		298,245			177,088
Restricted stock, at cost		2,921			1,953
Other real estate owned, net		365			375
Premises and equipment, net		8,591			6,267
Company owned life insurance		7,002			6,936
Accrued interest receivable		1,601			1,126
Goodwill		753			-
Other intangible assets		1,734			-
Deferred taxes		2,744			1,201
Other assets		1,455			1,231
Total Assets	$	435,321		$	289,230
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing	$	33,120		$	6,058
Interest bearing		297,131			203,382
Total deposits		330,251			209,440
Federal Home Loan Bank advances		33,510			19,958
Subordinate debenture		2,649			-
Accrued interest payable		134			33
Other liabilities		3,198			2,141
Total liabilities		369,742			231,572
Commitments and contingent liabilities		-			-
Shareholders' equity
Common stock, $.01 par value, 30,000,000 shares authorized,
3,904,884 and 3,347,263 issued and outstanding at March 31, 2014 and December 31, 2013 respectively		38			34
Additional paid-in-capital		38,056			30,080
Retained earnings		30,197			30,789
Unearned Employee Stock Ownership Plan (ESOP) shares		(2,361	)		(2,394	)
Accumulated other comprehensive loss		(351	)		(851	)
Total shareholders' equity		65,579			57,658
Total liabilities and shareholders' equity	$	435,321		$	289,230

See notes to unaudited consolidated financial statements.

1

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three months ended
	March 31,
	2014			2013
	(in thousands)
Interest and dividend income
Loans, including fees	$	2,569		$	2,446
Taxable securities		391			307
Tax exempt securities		125			160
Federal funds sold and other		26			30
		3,111			2,943
Interest expense
Deposits		358			478
Federal Home Loan Bank advances and other		94			117
		452			595
Net interest income		2,659			2,348
Provision for loan losses		-			99
Net interest income after provision for loan losses		2,659			2,249
Non-interest income
Service charges on deposits		154			129
Other service charges		8			7
Net gains on mortgage banking activity		94			222
Income from company owned life insurance		67			50
Loss on disposal of equipment		-			(10	)
Other		2			7
Total Non-Interest Income		325			405
Non-interest expense
Salaries and employee benefits		1,275			883
Occupancy and equipment		268			223
Data processing		254			182
Federal deposit insurance		29			43
Foreclosed assets, net		30			36
Advertising		38			36
Professional fees		394			221
Other taxes		59			63
Early termination fee		877			-
Other		339			349
Total Non-Interest Expense		3,563			2,036
Income (loss) before income taxes		(579	)		618
Income tax expense (benefit)		(154	)		172
Net income (loss)	$	(425	)	$	446
Earnings (loss) per share:
Basic	$	(0.13	)	$	0.14
Diluted	$	(0.13	)	$	0.14
Dividend per share	$	0.05		$	0.04

See notes to unaudited consolidated financial statements.

2

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Three months ended
	March 31,
	2014			2013
	(in thousands)
Net income (loss)	$	(425	)	$	446
Other comprehensive income (loss):
Unrealized holding gains (losses) on available for sale securities		756			(164	)
Reclassification adjustments for (gains) losses
included in net income		-			-
Net unrealized holding gains (losses) on available for sale securities		756			(164	)
Tax effect		(256	)		56
Other comprehensive income (loss):		500			(108	)
Comprehensive income	$	75		$	338

See notes to unaudited consolidated financial statements.

3

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

											Accumulated
			Additional					Unearned			Other			Total
	Common		Paid-In		Retained			ESOP			Comprehensive			Shareholders'
	Stock		Capital		Earnings			Shares			Income (loss)			Equity
	(in thousands)
Balances, January 1, 2014	$	34	$	30,080	$	30,789		$	(2,394	)	$	(851	)	$	57,658
Net loss		-		-		(425	)		-			-			(425	)
557,621 shares issued in business combination		4		7,830		-			-			-			7,834
Dividends paid		-		-		(167	)		-			-			(167	)
ESOP compensation earned		-		15		-			33			-			48
Stock based compensation expense		-		131		-			-			-			131
Other Comprehensive Income		-		-		-			-			500			500
Balances, March 31, 2014	$	38	$	38,056	$	30,197		$	(2,361	)	$	(351	)	$	65,579

See notes to unaudited consolidated financial statements.

4

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three months ended
	March 31,
	2014			2013
	(in thousands)
OPERATING ACTIVITY
Net income (loss)	$	(425	)	$	446
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation		117			110
Provision for loan losses		-			99
ESOP compensation expense		48			48
Stock based compensation expense		131			-
Loss on disposal of assets		-			10
Loss (gain) on sale of other real estate owned		10			(6	)
Net amortization on securities		108			230
Deferred income tax (benefit) expense		(58	)		67
Net gain on mortgage banking activities		(94	)		(222	)
Origination of loans held for sale		(707	)		(2,098	)
Proceeds from loans held for sale		744			2,069
Decrease in cash value of life insurance		(67	)		(50	)
Change in asset and libilities, net of assets and liabilities acquired
Accrued interest receivable		5			(40	)
Other assets		105			108
Accrued interest payable		71			98
Other liabilities		874			(3	)
Net cash from operating activities		862			866
INVESTING ACTIVITIES
Securities available for sale:
Proceeds from calls		7,000			2,500
Proceeds from maturities		120			689
Purchases		-			(2,000	)
Principal payments received		1,408			3,534
Cash received for acquisition, net		1,445			-
Loan originations and principal payments on loans, net		(2,828	)		4,376
Proceeds from the sale of other real estate owned		-			140
Purchase of office properties and equipment		(92	)		(73	)
Net cash from investing activities		7,053			9,166
FINANCING ACTIVITIES
Net change in deposits		3,761			(3,695	)
Payments on Federal Home Loan Bank borrowings		(1,448	)		(1,146	)
Cash dividends paid		(167	)		(135	)
Stock repurchases		-			(1,270	)
Net cash from (used in) financing activities		2,146			(6,246	)
INCREASE IN CASH AND CASH EQUIVALENTS		10,061			3,786
Cash and cash equivalents at beginning of year		6,684			17,778
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	16,745		$	21,564
Additional cash flows and supplementary information:
Cash paid during the year for:
Interest expense	$	351		$	497
Income taxes		-			95
Real estate acquired in settlement of loans	$	-		$	10

See notes to unaudited consolidated financial statements.

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements of Poage Bankshares, Inc. (the “Company”) and its wholly owned subsidiary Home Federal Savings and Loans Association (the “Association”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local economy.  Changes in the overall interest rate environment can significantly affect the Company’s net interest income and the value of its recorded assets and liabilities.  Actual results could differ from those estimates used in the preparation of the financial statements.

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 2014 and December 31, 2013 and the results of operations and cash flows for the interim periods ended March 31, 2014 and 2013. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto filed as part of the Company’s 2013 Annual Report on Form 10-KT filed with the Securities and Exchange Commission.

On October 21, 2013, the Company and the Association entered into an Agreement and Plan of Merger with Town Square Financial Corporation (“Town Square Financial”) and its bank subsidiary, Town Square Bank (“Town Square Bank”). On March 18, 2014 (the “Acquisition Date”), the Company and Association consummated the merger transaction. Town Square Financial merged with and into the Company, with the Company as the surviving entity, and Town Square Bank merged with and into the Association, with the Association as the surviving institution. The acquisition was accounted for using the acquisition method of accounting and resulted in the preliminary recordation of Goodwill of $753,000. See additional discussion in Note 10.

6

NOTE 2- ADOPTION OF NEW ACCOUNTING STANDARDS

In July 2013, the FASB amended existing guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. These amendments provide that an unrecognized tax benefit, or a portion thereof, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. These amendments are effective for interim and annual reporting periods beginning after December 15, 2013. Early adoption and retrospective application is permitted. The adoption of this standard did not have a material effect on the Company’s operating results or financial position.

7

NOTE 3 - SECURITIES AVAILABLE FOR SALE

The amortized cost and fair value of securities available for sale at March 31, 2014 and December 31, 2013 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
March 31, 2014
States and political subdivisions	$	27,479	$	648	$	(184	)	$	27,943
U.S. Government agencies and sponsored entities		21,260		-		(871	)		20,389
Government sponsored entities residential mortgage-backed:
FHLMC		18,402		50		(94	)		18,358
FNMA		14,842		65		(131	)		14,776
Collateralized mortgage obligations		7,355		-		(151	)		7,204
SBA loan pools		3,996		135		-			4,131
Total securities	$	93,334	$	898	$	(1,431	)	$	92,801
December 31, 2013
States and political subdivisions	$	22,277	$	484	$	(238	)	$	22,523
U.S. Government agencies and sponsored entities		27,260		-		(1,260	)		26,000
Government sponsored entities residential mortgage-backed:
FHLMC		17,390		38		(134	)		17,294
FNMA		12,400		61		(118	)		12,343
Collateralized mortgage obligations		3,834		-		(223	)		3,611
SBA loan pools		4,190		101		-			4,291
Total securities	$	87,351	$	684	$	(1,973	)	$	86,062

The proceeds from sales and calls of securities and the associated gross gains and losses are listed below (in thousands):

	Three months ended
	March 31,
	2014		2013
Proceeds	$	-	$	2,500
Gross gains		-		-
Gross losses		-		-

8

The amortized cost and fair value of the securities portfolio at March 31, 2014 are shown in the following table by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties (in thousands).

	March 31,
	2014
	Amortized		Fair
	Cost		Value
Securities with contractual maturities:	(in thousands)
One to five years	$	5,031	$	5,213
Five to ten years		33,667		33,150
Beyond ten years		14,037		14,100
Mortgage-backed securities and collateralized mortgage obligations		40,599		40,338
Total	$	93,334	$	92,801

The following table summarizes the securities with unrealized losses at March 31, 2014 and December 31, 2013, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):

	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
March 31, 2014
States and political subdivisions	$	7,767	$	(184	)	$	-	$	-		$	7,767	$	(184	)
U.S. Government agencies and
sponsored entities		12,107		(412	)		8,291		(459	)		20,398		(871	)
Government sponsored entities
residential mortgage backed:
FHLMC		12,097		(94	)		-		-			12,097		(94	)
FNMA		9,165		(131	)		-		-			9,165		(131	)
Collateralized mortgage
obligations		7,259		(151	)		-		-			7,259		(151	)
Total temporarily impaired	$	48,395	$	(972	)	$	8,291	$	(459	)	$	56,686	$	(1,431	)
December 31, 2013
States and political subdivisions	$	7,302	$	(238	)	$	-	$	-		$	7,302	$	(238	)
U.S. Government agencies and
sponsored entities		20,916		(844	)		5,084		(416	)		26,000		(1,260	)
Government sponsored entities
residential mortgage backed:
FHLMC		10,769		(134	)		-		-			10,769		(134	)
FNMA		6,479		(118	)		-		-			6,479		(118	)
Collateralized mortgage
obligations		3,611		(223	)		-		-			3,611		(223	)
Total temporarily impaired	$	49,077	$	(1,557	)	$	5,084	$	(416	)	$	54,161	$	(1,973	)

Unrealized losses on bonds have not been recognized into income because the issuers of the bonds are of high credit quality, management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bonds approach maturity.

9

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement, and 2) OTTI related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

NOTE 4 – LOANS

Loans at March 31, 2014 and December 31, 2013 were as follows (in thousands):

	March 31,		December 31,
	2014		2013
Real estate:
One to four family	$	176,472	$	135,243
Multi-family		5,683		889
Commercial real estate		54,235		17,321
Construction and land		11,059		2,176
		247,449		155,629
Commercial and Industrial		27,285		5,641
Consumer
Home equity lines of credit		8,311		5,953
Motor vehicle		10,526		8,902
Other		6,696		2,960
		25,533		17,815
Total		300,267		179,085
Less:   Net deferred loan fees		155		89
Allowance for loan losses		1,867		1,908
	$	298,245	$	177,088

10

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2014 and December 31, 2013. Accrued interest receivable and net deferred loans fees are not considered significant and therefore are not included in the loan balances presented in the table below (in thousands):

March 31, 2014
	Allowance for Loan Losses								Loan Balances
	Individually		Purchased		Collectively				Individually		Purchased		Collectively
	Evaluated for		Credit-Impaired		Evaluated for				Evaluated for		Credit-Impaired		Evaluated for
Loan Segment	Impairment		Loans		Impairment		Total		Impairment		Loans		Impairment		Total
Real estate	$	-	$	-	$	1,767	$	1,767	$	-	$	1,399	$	246,050	$	247,449
Commercial and industrial		-		-		11		11		-		3,846		23,439		27,285
Consumer		-		-		44		44		-		161		25,372		25,533
Unallocated		-		-		45		45		-		-		-		-
Total	$	-	$	-	$	1,867	$	1,867	$	-	$	5,406	$	294,861	$	300,267

December 31, 2013
	Allowance for Loan Losses								Loan Balances
	Individually		Purchased		Collectively				Individually		Purchased		Collectively
	Evaluated for		Credit-Impaired		Evaluated for				Evaluated for		Credit-Impaired		Evaluated for
Loan Segment:	Impairment		Loans		Impairment		Total		Impairment		Loans		Impairment		Total
Real estate	$	-	$	-	$	1,818	$	1,818	$	-	$	-	$	155,629	$	155,629
Commercial and industrial		-		-		8		8		-		-		5,641		5,641
Consumer		-		-		52		52		-		-		17,815		17,815
Unallocated		-		-		30		30		-		-		-		-
Total	$	-	$	-	$	1,908	$	1,908	$	-	$	-	$	179,085	$	179,085

The Company held no loans that were individually evaluated for impairment but acquired certain loans in the merger with Town Square Financial that were impaired at the time of the merger.

11

The following table sets forth an analysis of our allowance for loan losses for the three months ended March 31, 2014 and 2013 (in thousands):

Three Months Ended
March 31, 2014	Real Estate			Commercial			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	1,818		$	8		$	52		$	30	$	1,908
Provision for loan losses		3			(15	)		(6	)		18		-
Loans charged-off		(56	)		-			(5	)		-		(61	)
Recoveries		2			18			-			-		20
Total ending allowance balance	$	1,767		$	11		$	41		$	48	$	1,867

Three Months Ended
March 31, 2013	Real Estate			Commercial		Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	1,876		$	38	$	77		$	-	$	1,991
Provision for loan losses		97			3		(1	)		-		99
Loans charged-off		(152	)		-		-			-		(152	)
Recoveries		37			-		-			-		37
Total ending allowance balance	$	1,858		$	41	$	76		$	-	$	1,975

As of March 31, 2014, there were $5.4 million of purchased credit impaired loans which were acquired in a business combination completed on March 18, 2014 (see Note 10). There were no impaired loans as of or during the three months ended March 31, 2013, or the three months ended December 31, 2013.

Nonaccrual loans and loans past due 90 days still on accrual consist of smaller balance homogeneous loans that are collectively evaluated for impairment.

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2014 and December 31, 2013 (in thousands):

	March 31, 2014				December 31, 2013
			Loans Past Due				Loans Past Due
			Over 90 Days				Over 90 Days
	Nonaccrual		Still Accruing		Nonaccrual		Still Accruing
Real estate:
One to four family	$	1,295	$	226	$	810	$	-
Multi-family		-		-		-		-
Commercial real estate		1,497		-		36		-
Construction and land		586		-		80		-
Commercial and industrial		503		-		-		-
Consumer:
Home equity loans and lines of credit		146		-		-		-
Motor vehicle		5		-		-		-
Other		6		3		-		-
Total	$	4,038	$	229	$	926	$	-

At March 31, 2014, $3.2 million of purchased credit impaired loans were non-performing loans and are included in the table above.

12

The following table presents the aging of the recorded investment in past due loans as of March 31, 2014 and December 31, 2013 by class of loans. Non-accrual loans of $4.0 million as of March 31, 2014 and $926,000 at December 31, 2013 are included in the tables below and have been categorized based on their payment status (in thousands).

	30 - 59		60 - 89		Greater than
	Days		Days		90 Days		Total		Loans Not		Total
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans
March 31, 2014
Real estate:
One to four family	$	2,604	$	170	$	1,020	$	3,794	$	172,678	$	176,472
Multi-family		-		-		-		-		5,683		5,683
Commercial real estate		-		-		508		508		53,727		54,235
Construction and land		3		-		169		172		10,887		11,059
Commercial and industrial		13		61		482		556		26,729		27,285
Consumer:
Home equity loans and lines of credit		52		-		136		188		8,123		8,311
Motor vehicle		81		6		3		90		10,436		10,526
Other		26		12		6		44		6,652		6,696
Total	$	2,779	$	249	$	2,324	$	5,352	$	294,915	$	300,267
	30 - 59		60 - 89		Greater than
	Days		Days		90 Days		Total		Loans Not		Total
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans
December 31, 2013
Real estate:
One to four family	$	280	$	11	$	810	$	1,101	$	134,142	$	135,243
Multi-family		-		-		-		-		889		889
Commercial real estate		-		-		36		36		17,285		17,321
Construction and land		41		-		80		121		2,055		2,176
Commercial and industrial		-		-		-		-		5,641		5,641
Consumer:
Home equity loans and lines of credit		17		-		-		17		5,936		5,953
Motor vehicle		15		8		-		23		8,879		8,902
Other		2		8		-		10		2,950		2,960
Total	$	355	$	27	$	926	$	1,308	$	177,777	$	179,085

CREDIT QUALITY INDICATORS:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans, such as commercial and commercial real estate loans. The analysis for residential real estate and consumer loans primarily includes review of past due status. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

13

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

	Pass		Special Mention		Substandard		Doubtful		Not Rated
March 31, 2014
One to four family	$	169,725	$	3,641	$	3,106	$	-	$	-
Multi-family		5,683		-		-		-		-
Commercial real estate		50,950		-		3,285		-		-
Construction and land		9,831		-		1,228		-		-
Commercial and industrial		26,536		31		718		-		-
Home equity loans and lines of credit		8,094		53		164		-		-
Motor vehicle		10,471		24		21		-		-
Other		6,692		-		14		-		-
Total	$	287,982	$	3,749	$	8,536	$	-	$	-
December 31, 2013
One to four family	$	130,408	$	3,176	$	1,659	$	-	$	-
Multi-family		889		-		-		-		-
Commercial real estate		16,861		-		460		-		-
Construction and land		1,668		-		508		-		-
Commercial and industrial		5,641		-		-		-		-
Home equity loans and lines of credit		5,914		33		6		-		-
Motor vehicle		8,876		5		21		-		-
Other		2,960		-		-		-		-
Total	$	173,217	$	3,214	$	2,654	$	-	$	-

The Company had two troubled debt restructurings which totaled $226,000 as of March 31, 2014 and no troubled debt restructuring at December 31, 2013.

14

NOTE 5: FEDERAL HOME LOAN BANK ADVANCES

Advances from the FHLB at March 31, 2014 and December 31, 2013 were as follows: (in thousands)

	March 31,		December 31,
	2014		2013
Maturities April 2014 through June 2024, fixed rate at
rates from 0.12% to 6.70%, weighted average rate of 1.00%
at March 31, 2014 and 1.88% at December 31, 2013	$	33,510	$	19,958

Payments contractually required over the next five years are as follows (in thousands):

March 31,
2015	$	25,495
2016		2,697
2017		2,160
2018		1,733
2019		1,153
Thereafter		272
Total	$	33,510

NOTE 6: FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair value:

Securities: The fair values for securities are determined by quoted market prices, if available (Level 1). If quoted market prices are not available, fair values are based on quoted market prices of similar securities (Level 2). This includes the use of “matrix pricing” used to value debt securities absent the exclusive use of quoted prices. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows (Level 3).

Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

15

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below (in thousands):

			Fair Value Measurements at
			March 31, 2014 Using:
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets Securities:
States and political
subdivisions	$	27,943	$	-	$	27,943	$	-
U.S. Government agencies and
sponsored entitites		20,389		-		20,389		-
Mortgage backed securities: Residential		33,134		-		33,134		-
Collateralized mortgage obligations		7,204		-		7,204		-
SBA loan pools		4,131		-		4,131		-
Total securities	$	92,801	$	-	$	92,801	$	-

			Fair Value Measurements at December 31, 2013 Using:
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets Securities:
States and political subdivisions	$	22,523	$	-	$	22,523	$	-
U.S. Government agencies and sponsored entitites		26,000		-		26,000		-
Mortgage backed securities: residential		29,637		-		29,637		-
Collateralized mortgage obligations		3,611		-		3,611		-
SBA loan pools		4,291		-		4,291		-
Total securities	$	86,062	$	-	$	86,062	$	-

For the periods ended March 31, 2014 and December 31, 2013, there were no transfers between Level 1 and Level 2.

16

Assets measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements at
			March 31, 2014 Using:
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
March 31, 2014	Value		(Level 1)		(Level 2)		(Level 3)
Other real estate owned
One to four family	$	6	$	-	$	-	$	6
Commercial Real Estate		280		-		-		280

			Fair Value Measurements at
			December 31, 2013 Using:
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
December 31, 2013	Value		(Level 1)		(Level 2)		(Level 3)
Other real estate owned
One to four family	$	6	$	-	$	-	$	6
Commercial Real Estate		290		-		-		290

Commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Appraisals for real estate properties classified as other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Association’s management. The appraisal values are discounted to allow for selling expenses and fees, and the discounts range from 5% to 10%.

At March 31, 2014, other real estate owned had a net carrying amount of $286,000 made up of the outstanding balance of $454,000 net of a valuation allowance of $168,000, which resulted in a write-down of $10,000 for the three months ended March 31, 2014. At December 31, 2013, other real estate owned had a net carrying amount of $296,000 made up of the outstanding balance of $454,000, net of a valuation allowance of $158,000. There was no write-down for the three months ended December 31, 2013. At March 31, 2013, other real estate owned had a net carrying amount of $147,000 made up of the outstanding balance of $165,000 net of a valuation allowance of $18,000. There was no write-down for the three months ended March 31, 2013.

17

The carrying amounts and estimated fair values of financial instruments at March 31, 2014 and December 31, 2013 are as follows (in thousands):

			Fair Value Measurements
	Carrying
	Value		Level 1		Level 2		Level 3		Total
March 31, 2014
Financial assets
Cash and cash equivalents	$	16,745	$	16,745	$	-	$	-	$	16,745
Securities		92,801		-		92,801		-		92,801
Restricted stock		2,921		N/A		N/A		N/A		N/A
Loans held for sale		364		-		372		-		372
Loans, net		298,245		-		-		309,044		309,044
Accrued interest receivable		1,601		-		495		1,106		1,601
Financial liabilities
Deposits	$	330,251	$	159,930	$	171,175	$	-	$	331,105
Federal Home Loan Bank advances		33,510		-		33,510		-		33,510
Subordinate debenture		2,649				2,649				2,649
Accrued interest payable		134		-		134		-		134

December 31, 2013	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	6,684	$	6,684	$	-	$	-	$	6,684
Securities		86,062		-		86,062		-	$	86,062
Restricted stock		1,953		N/A		N/A		N/A		N/A
Loans held for sale		307		-		314		-	$	314
Loans, net		177,088		-		-		188,666	$	188,666
Accrued interest receivable		1,126		-		471		655	$	1,126
Financial liabilities
Deposits	$	209,440	$	87,733	$	122,596	$	-	$	210,329
Federal Home Loan Bank advances		19,958		-		20,044		-	$	20,044
Accrued interest payable		33		-		33		-	$	33

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Cash and Cash Equivalents:

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Restricted Stock:

It is not practical to determine the fair value of FHLB and Bankers Bank of Kentucky stock due to restrictions place on its transferability.

Loans:

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

18

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

Deposits:

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are by definition equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Federal Home Loan Bank advances and subordinate debenture:

The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Accrued Interest Receivable/Payable:

The carrying amounts of accrued interest approximate fair value and are classified by level consistent with the level of the related assets or liabilities.

NOTE 7 - ESOP PLAN

Employees participate in an Employee Stock Option Plan (“ESOP”). The ESOP borrowed from the Company to purchase 269,790 shares of the Company’s common stock at $10 per share. The Company makes discretionary contributions to the ESOP, and pays dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Dividends on allocated shares increase participant accounts. Participants receive the shares at the end of employment.

There were no contributions to the ESOP for the three months ended March 31, 2014 or 2013.

Shares held by the ESOP at March 31, 2014 and December 31, 2013 was as follows:

	March 31, 2014		December 31, 2013
Allocated to participants		30,022		30,351
Released, but unallocated		3,372		-
Unearned		236,069		239,439
Total ESOP shares		269,463		269,790
Fair value of unearned shares (in thousands)	$	3,347	$	3,355

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NOTE 8 – EARNINGS PER SHARE

The factors used in the earnings per share computation for the three months ended March 31, 2014 and 2013, follow (in thousands):

	Three months ended
	March 31,
	2014			2013
Basic
Net income (loss)	$	(425	)	$	446
Less: Net income (loss) allocated to participating securities		(23	)		-
Net income (loss) available to common shareholders		(402	)		446
Weighted average common shares outstanding		3,427,808			3,346,989
Less:  Average unallocated ESOP shares		(239,439	)		(252,928	)
Average participating shares		(134,895	)		-
Average shares		3,053,474			3,094,061
Basic earnings (loss) per common share	$	(0.13	)	$	0.14
Diluted
Net income (loss) allocated to common shareholders	$	(402	)	$	446
Weighted average common shares outstanding
for basic earnings (loss) per common share		3,053,474			3,094,061
Add:  Dilutive effects of assumed exercises of stock options		-			-
Average shares and dilutive potential common shares		3,053,474			3,094,061
Diluted earnings (loss) per common share	$	(0.13	)	$	0.14

There were no potentially dilutive securities outstanding at March 31, 2014 or 2013. Stock options of 320,000 shares of common stock were not considered in computing diluted earnings per common share for 2014 or 2013 because they were antidilutive.

NOTE 9 – STOCK BASED COMPENSATION

On January 8, 2013, the shareholders of Poage Bankshares, Inc. approved the Poage Bankshares, Inc. 2013 Equity Incentive Plan (the “Plan”) for employees and directors of the Company. The Plan authorizes the issuance of up to 472,132 shares of the Company’s common stock, with no more than 134,895 of shares as restricted stock awards and 337,237 as stock options, either incentive stock options or non-qualified stock options. The exercise price of options granted under the Plan may not be less than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted.

On April 16, 2013, the compensation committee of the board of directors approved the issuance of 134,895 shares of restricted stock to its directors and officers. In addition, on May 10, 2013, the compensation committee of the board of directors approved the issuance of 300,000 stock options to its directors and officers. All stock options and restricted stock awards vest ratably over five years. Stock options expire ten years after issuance. Apart from the vesting schedule for both stock options and restricted stock, there are no performance-based conditions or any other material conditions applicable to the awards issued.

20

The following table summarizes stock option activity for the three months ended March 31, 2014:

			Exercise
	Options		Price
Outstanding - December 31, 2013		300,000		$14.86 - $15.00
Granted		20,000	$	14.07
Exercised		-		-
Forfeited		-		-
Outstanding - March 31, 2014		320,000		$14.07 - $15.00
Fully vested and exercisable at March 31, 2014		-		-
Fully vested and exercisable at December 31, 2013		-		-
Expected to vest in future periods		320,000		-

The fair value for each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the following assumptions. The Company uses the U.S. Treasury yield curve in effect at the time of the grant to determine the risk-free interest rate. The expected dividend yield is estimated using the projected annual dividend level and recent stock price of the Company’s common stock at the date of grant. Expected stock volatility is based on historical volatilities of the Company’s common stock. The expected term of the options is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable.

The weighted-average assumptions used in the Black-Scholes-Merton option pricing model to determine the fair value of options granted was as follows:

	Three months ended
	March 31, 2014
Risk-free interest rate		2.16	%
Expected dividend yield		1.42	%
Expected stock volatility		11.79
Expected life (years)		7
Weighted average fair value of options granted	$	1.88

Stock options are assumed to be earned ratably over their respective vesting periods and charged to compensation expense based upon their grant date fair value and the number of options assumed to be earned. No options were vested during the three months ended March 31, 2014. Stock-based compensation expense for stock options for the three months ended March 31, 2014 was $29,000 and there was no expense for the three months ended March 31, 2013. Total unrecognized compensation cost related to non-vested stock options was $544,000 at March 31, 2014 and, $535,000 at December 31, 2013 and is expected to be recognized over a period of 5.0 years.

The following table summarizes non-vested restricted stock activity for the three months ended March 31, 2014:

Balance - December 31, 2013	134,895
Granted	-
Forfeited	-
Vested	-
Balance - March 31, 2014	134,895

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (generally five years) and is based on the market price of the Company’s common stock at the date of the grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for the restricted stock included in salaries and benefits for the three months ended March 31, 2014 was $102,000 and there was no expense for the three months ended March 31, 2013. Unrecognized compensation expense for non-vested restricted stock awards was $1,649,000 at March 31, 2014 and is expected to be recognized over a weighted-average period of 5 years.

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NOTE 10 – BANK ACQUISITION

On March 18, 2014, the Company acquired Town Square Financial, the bank holding company for Town Square Bank in exchange for cash and common shares of the Company’s stock. Concurrent with the Company’s acquisition, Town Square Bank merged with and into Home Federal, with Home Federal as the surviving institution. Under the terms of the Merger Agreement, 55% of the outstanding shares of Town Square Financial common stock were converted into 2.3289 shares of Poage common stock for each share of Town Square Financial common stock. Each of the remaining 45% of the outstanding shares of Town Square Financial common stock were exchanged for $33.86 in cash. Town Square Financial shareholders received approximately 557,621 shares of Company common stock and an aggregate of $6.6 million in cash. Town Square Financial was a registered bank holding company engaged in commercial banking and financial services through its wholly owned subsidiary, Town Square Bank, a Kentucky chartered bank headquartered in Ashland, Kentucky.

Town Square Bank’s business consisted primarily of accepting savings accounts and certificates of deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in first lien one-to-four family mortgage loans, commercial and multi-family real estate loans, commercial and industrial loans, consumer loans, consisting primarily of automobile loans, and construction loans. With the acquisition of Town Square Financial and Town Square Bank, the Company expanded its customer base in Eastern and Central Kentucky area with an institution that shared its community banking orientation and enjoyed a favorable reputation in the community. Town Square Bank also purchased investment securities consisting primarily of mortgage-backed securities issued by United States Government agencies and government-sponsored enterprises, and obligations of state and political subdivisions. Town Square Bank offered a variety of deposit accounts, including NOW and demand accounts, certificates of deposits, money market accounts and individual retirement accounts, as well as credit cards for both personal and business purposes. Town Square Bank had three branches located in Boyd County, Kentucky and one branch in Jessamine County, Kentucky, each of which were integrated into Home Federal at the close of the merger transaction.

Acquisition costs of $1.2 million are included in the Company’s consolidated statement of operations for the three months ended March 31, 2014. Operations of the acquired financial institution resulted in additional net income of $67,000 from the period March 18, 2014 to March 31, 2014. The Company has determined that the acquisition constitutes a business combination as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805,Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their estimated fair values as required by the accounting guidance. Fair values were determined based on the requirements of ASC Topic 820,Fair Value Measurements.

In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events which are highly subjective in nature and are subject to change. The assets acquired and liabilities assumed in the transaction are presented at estimated fair value on the acquisition date. These fair value estimates are considered preliminary, and are subject to change as additional information relative to acquisition date fair values becomes available. Given the short period of time from our closing date until our Form 10-Q filing date, we have not yet completed our evaluation of fair values. We continue to work to finalize these estimates.

22

Goodwill of $753,000 arising from the acquisition is attributable to significant operating scale and strong competitive positioning within the Kentucky market. The goodwill is not tax deductible. For United States federal income tax purposes, the acquisition qualified as a reorganization with the meaning of Section 368(a) of the Internal Revenue Code, which means, in general for United States federal income tax purposes, no gain or loss will be recognized by Poage Bankshares or Town Square Financial as a result of the acquisition. The following table summarizes the consideration paid and the amount of assets acquired and liabilities assumed recognized at the acquisition date.

(in thousands)	March 18, 2014
Consideration
Stock Consideration	$	7,836
Cash Consideration		6,635
Fair Value of Total Consideration Transferred	$	14,471
Recognized amounts of identifiable assets acquired and liabilities assumed
Assets acquired
Cash and due from banks	$	3,484
Federal funds sold		4,596
Securities available for sale		14,691
Restricted stock		968
Loans		118,257
Premises and equipment, net		2,349
Accrued interest receivable		480
Prepaid expenses and other assets		329
Deferred federal income taxes		1,743
Core deposit intangible		1,734
Total assets acquired	$	148,631
Fair value of liabilities assumed
Deposits		117,050
Subordinated debenture and FHLB advances		17,649
Accrued interest payable		30
Other liabilities		184
Total liabilities assumed		134,913
Total identifiable net assets	$	13,718
Goodwill	$	753

Acquired loans have a contractual balance of approximately $124,699,000 and the preliminary analysis results in expected cash flows totaling $121,227,000 and an estimated fair value of $118,257,000. 

The following table presents pro forma information as if the acquisition had occurred at the beginning of the periods presented (January 1, in this case.) The pro forma information includes adjustments for interest income and expense on interest earning assets and interest bearing liabilities as well as amortization of core deposit intangible and the related income tax effects. Other adjustments are not anticipated to have a material impact on the pro forma information. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates.

	Three months ended
	March 31,
(in thousands, exept per share data)	2014			2013
Net Interest Income	$	4,113		$	4,101
Net Income (loss)	$	(262	)	$	955
Basic and diluted earnings (loss) per share	$	(0.09	)	$	0.31

NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table is changes in Accumulated Other Comprehensive Income (Loss) by component, net of tax for the three months ended March 31, 2014.

	Unrealized Gains and
	Losses on Available-
	For-Sale Securities
Beginning balance	$	(851	)
Other comprehensive income before reclassification		500
Amounts reclassified from accumulated to other comprehensive income		-
Net current period other comprehensive income		500
Ending Balance	$	(351	)

23

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report contains forward-looking statements, which can be identified by the use of such words as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may,” and similar expressions. These forward-looking statements include, but are not limited to:

· statements of our goals, intentions and expectations;

· statements regarding our business plans and prospects and growth and operating strategies;

· statements regarding the asset quality of our loan and investment portfolios; and

· estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.

The following factors, among others, could cause the actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

· our ability to manage our operations under the current adverse economic conditions (including real estate values, loan demand, inflation, commodity prices and unemployment levels) nationally and in our market area;

· adverse changes in the financial industry, securities, credit and national local real estate markets (including real estate values);

· significant increases in our loan losses, including as a result of our inability to resolve classified assets, and management’s assumptions in determining the adequacy of the allowance for loan losses;

· credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;

· our ability to successfully enhance internal controls;

· our businesses may not be combined successfully, or such combination may take longer to accomplish than expected;

· the growth opportunities and cost savings from the acquisition of Town Square Financial Corporation and Town Square Bank may not be fully realized or may take longer to realize than expected;

· our ability to manage increased expenses following the acquisition of Town Square Financial Corporation and Town Square Bank, including salary and employee benefit expenses and occupation expenses;

· operating costs, customer losses and business disruption following the acquisition of Town Square Financial Corporation and Town Square Bank, including adverse effects of relationships with employees, may be greater than expected;

· competition among depository and other financial institutions;

· our success in increasing our originations of adjustable-rate mortgage loans;

· our success in increasing our commercial business, commercial real estate and multi-family lending;

· our ability to improve our asset quality even as we increase our commercial business, commercial real estate and multi-family lending, including as a result of the acquisition of Town Square Financial Corporation and Town Square Bank;

· our success in introducing new financial products;

· our ability to attract and maintain deposits, including former depositors of Town Square Bank;

· decreases in our asset quality;

· changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;

· fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area;

· changes in consumer spending, borrowing and savings habits;

· further declines in the yield on our assets resulting from the current low interest rate environment;

· risks related to a high concentration of loans secured by real estate located in our market area;

· the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;

· changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements (particularly the new capital regulations), regulatory fees and compliance costs and the resources we have available to address such changes;

· changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; changes in our organization, compensation and benefit plans;

· expenses and diversion of management’s time and attention resulting from our efforts to oppose stockholder nominations that we do not believe are in the best interests of stockholders;

· loan delinquencies and changes in the underlying cash flows of our borrowers; and

· changes in the financial condition or future prospects of issues of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

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Critical Accounting Policies

The only change to the critical accounting policies disclosed in Poage, Bankshares, Inc’s Annual Report on Form 10-KT, as filed with the Securities and Exchange Commission on March 28, 2014, is the Company accounted for the acquisition of Town Square Financial Corporation in accordance with the acquisition method as outlined in ASC Topic 805, Business Combinations. The acquisition method requires: a) identification of the entity that obtains control of the acquired; b) determination of the acquisition date; c) recognition and measurement of the identifiable assets acquired and liabilities assumed at fair value; and d) recognition and measurement of goodwill or bargain purchase gain.

Comparison of Financial Condition at March 31, 2014 and December 31, 2013

Assets:At March 31, 2014, the Company’s assets totaled $435.3million, an increase of $146.0 million, or 50.5% from total assets at December 31, 2013. The increase was attributed primarily to the acquisition of Town Square Financial Corporation. See Footnote 10 under “Item 1: Financial Information.”

Cash and Cash equivalents increased by $10.0 million, or 149.3% to $16.7 million at March 31, 2014 from $6.7 million at December 31, 2013, primarily due to the acquisition of Town Square Financial Corporation.

Loans held for sale increased $57,000, or 18.6%, to $364,000 at March 31, 2014 from $307,000 at December 31, 2013.

Loans receivable, net, increased $121.1 million, or 68.4%, to $298.2 million at March 31, 2014 from $177.1 million at December 31, 2013. Non-performing loans increased $3.3 million, or 360.8%, from $926,000 at December 31, 2013 to $4.3 million at March 31, 2014. These increases were primarily due to the acquisition of Town Square Financial Corporation.

Securities available for sale increased by $6.7 million, or 7.8%, to $92.8 million at March 31, 2014 from $86.1 million at December 31, 2013. This increase was primarily due to the acquisition of Town Square Financial Corporation partially offset by calls, regular maturities and principal payments.

Deposits increased $120.9 million, or 57.7%, to $330.3 million at March 31, 2014 from $209.4 million at December 31, 2013. The increase was primarily attributable to the acquisition of Town Square Financial Corporation.

Federal Home Loan Bank advances increased $13.5 million, or 67.5%, to $33.5 million at March 31, 2014 from $20.0 million at December 31, 2013. This increase in borrowings was primarily due to the acquisition of Town Square Financial Corporation partially offset by regular principal payments and maturities.

Other borrowings increased by $2.6 million to $2.6 million at March 31, 2014 from $0 at December 31, 2013 as a result of the assumption of $2.6 million of subordinated debt assumed in conjunction with acquisition of Town Square Financial Corporation. In December 2006, Town Square Statutory Trust I, a trust formed by Town Square Financial Corporation, closed a pooled private offering of 4,124 trust preferred securities with a liquidation amount of $1,000 per security. The subordinated debt of $2.6 million is shown as a liability because the Company is not considered the primary beneficiary of the Trust. The investment in common stock of the trust is $124,000 and is included in other assets. The subordinated debt has a variable rate of interest equal to the three month London Interbank Offered Rate (LIBOR) plus 1.83%, which was 2.06% at March 31, 2014.

Total shareholders’ equity increased by $7.9 million to $65.6 million at March 31, 2014, compared to $57.7 million at December 31, 2013. The increase resulted primarily from the issuance of common stock to acquire Town Square Financial Corporation and an increase in other comprehensive income of $500,000, partially offset by net loss of $425,000 for the three months ended March 31, 2014 and the payment of cash dividends totaling $167,000.

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Average Balance and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.

The average balance, interest and dividends paid and received, and yield/cost of assets and liabilities include assets and liabilities acquired through the Town Square acquisition. Because the Town Square acquisition was consummated on March 18, 2014, accretive benefits and costs from the transaction will largely occur in quarters subsequent to the three months ended March 31, 2014.

	For the Three Months Ended March 31,
	2014								2013
	Average Balance		Interest and Dividends			Yield/ Cost			Average Balance		Interest and Dividends			Yield/ Cost
Assets:
Interest-earning assets:
Loans	$	196,464	$	2,569			5.23	%	$	175,715	$	2,446			5.57	%
Investment securities		85,000		516			2.43	%		96,998		467			1.93	%
FHLB stock		2,093		22			4.20	%		1,953		21			4.30	%
Other interest-earning assets		8,473		4			0.19	%		19,441		9			0.19	%
Total interest-earning assets		292,030		3,111			4.26	%		294,107		2,943			4.00	%
Noninterest-earning assets		20,666								17,056
Total assets		312,696								311,163
Liabilities and equity:
Interest bearing liabilities:
Interest bearing deposits:
NOW, savings, money market, and other		89,011		38			0.17	%		86,197		49			0.23	%
Certificates of deposit		127,449		320			1.00	%		139,597		429			1.23	%
Total interest bearing deposits		216,460		358			0.66	%		225,794		478			0.85	%
FHLB advances and other borrowings		25,667		94			1.46	%		15,836		117			2.96	%
Total interest bearing liabilities		242,127		452			0.75	%		241,630		595			0.98	%
Non-interest bearing liabilities:
Non-interest bearing deposits		9,771								7,377
Accrued interest payable		145								163
Other liabilities		2,823								3,041
Total non-interest bearing liabilities		12,739								10,581
Total liabilities		254,866								252,211
Total equity		57,830								58,952
Total liabilities and equity	$	312,696							$	311,163
Net interest income			$	2,659							$	2,348
Interest rate spread							3.51	%							3.02	%
Net interest margin							3.64	%							3.19	%
Average interest-earning assets to average interest-bearing liabilities				120.61	%							121.72	%

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Liquidity and Capital Resources

Our primary sources of funds are deposits and the proceeds from principal and interest payments on loans and investment securities. We also utilize Federal Home Loan Bank advances. While maturities and scheduled amortization of loans and securities are predicable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally manage the pricing of our deposits to be competitive within our market and to increase core deposit relationships.

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term investment securities. If we require funds beyond our ability to generate them internally we have additional borrowing capacity with the Federal Home Loan Bank of Cincinnati. At March 31, 2014, we had $33.5 million in advances from the Federal Home Loan Bank of Cincinnati, of which $15.0 million were assumed in the acquisition of Town Square Financial, and an additional borrowing capacity of $61.1 million.

The Association is subject to various regulatory capital requirements administered by its primary federal regulator, the Office of the Comptroller of the Currency (“OCC”). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that if undertaken, could have a direct material effect on the Association and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines involving quantitative measures of the Association's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

The Association's capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), Tier I capital to adjusted total assets (as defined), and tangible capital to adjusted total assets (as defined).

As of March 31, 2014, based on the most recent notification from the OCC, the Association was categorized as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the most recent notification that management believes have changed the Association’s prompt corrective action category.

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Actual and required capital amounts (in thousands) and ratios for the Association are presented below at at March 31, 2014 and December 31, 2013:

												To Be Well
												Capitalized Under
						For Capital Adequacy						Prompt Corrective
	Actual					Purposes						Action Regulations
	Amount		Ratio			Amount			Ratio			Amount			Ratio
As of March 31, 2014:
Total Risk-Based Capital
(to Risk-weighted Assets)	$	63,817		23.83	%	$	21,425	≥		8.00	%	$	26,782	≥		10.00	%
Tier I Capital
(to Risk-weighted Assets)		61,941		23.13	%		10,713	≥		4.00	%		16,069	≥		6.00	%
Tier I Capital
(to Adjusted Total Assets)		61,941		14.29	%		17,335	≥		4.00	%		21,669	≥		5.00	%

													To Be Well
													Capitalized Under
						For Capital Adequacy							Prompt Corrective
	Actual					Purposes							Action Regulations
	Amount		Ratio			Amount			Ratio				Amount			Ratio
As of December 31, 2013:
Total Risk-Based Capital
(to Risk-weighted Assets)	$	48,796		32.12	%	$	12,155	≥		8.00	%	≥	$	15,194	≥		10.00	%
Tier I Capital
(to Risk-weighted Assets)	$	46,896		30.87	%	$	6,077	≥		4.00	%	≥	$	9,116	≥		6.00	%
Tier I Capital
(to Adjusted Total Assets)	$	46,896		16.16	%	$	11,609	≥		4.00	%	≥	$	14,511	≥		5.00	%

Off-Balance Sheet Arrangements.In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

Comparison of Operating Results for the Three Months Ended March 31, 2014 and March 31, 2013

General. Net income decreased $871,000 to a loss of $425,000 for the three months ended March 31, 2014 from a net income of $446,000 for the three months ended March 31, 2013. The decrease in net income reflected an increase in net interest income of $311,000 for the three months ended March 31, 2014, offset by an increase in non-interest expense of $1.6 million to $3.6 million for the three months ended March 31, 2013 from $2.0 million for the three months ended March 31, 2013.

The increase in non-interest expenses is primarily attributable to a non-recurring expense of $877,000 related to the termination of Town Square Financial’s data processing agreement, as well as increases in professional fees resulting from the Town Square acquisition and our efforts to oppose stockholder nominations.

Income Calculated to Eliminate Certain Non-Recurring Expenses.The following table provides a reconciliation of net loss in accordance with U.S. generally accepted accounting principles (“GAAP”) and what net income would have been without certain merger related and proxy contest related expenses: 

Net Loss	$	(425	)
Adjustment for certain non-recurring merger related expenses:
Data Processing Termination Fee		877
Merger related professional fees		267
Professional fees related to a proxy contest		29
		1,173
Tax effect of adjustments for certain non-recurring merger related expenses		(399	)
Adjustment net of tax		774
Adjusted Net Income	$	349

NON-GAAP FINANCIAL MEASURES

The foregoing discussion in the section captioned “Income Calculated to Eliminate Certain Non-Recurring Expenses” contains certain non-GAAP financial measures in addition to results provided in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). These non-GAAP measures provide supplemental perspectives on operating results, performance trends, and financial condition. They are not a substitute for GAAP measures and should be read and used in conjunction with the Company's financial statements and notes included in this quarterly report on Form 10-Q, which were prepared in accordance with GAAP. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. The Company's non-GAAP measure of adjusted net income is intended to reflect the Company's net income for the three months ended March 31, 2014 is based on the assumption that certain non-recurring merger related expenses and expenses related to the Company’s opposition of a stockholder nomination were not incurred during the three months ended March 31, 2014. Charges related to the merger transaction consist primarily of a data processing termination fee and professional fees and charges related to the Company’s opposition of a stockholder nomination consist primarily of professional fees.

Interest Income. Interest income increased $168,000, or 5.7% to $3.1 million for the three months ended March 31, 2014 from $2.9 million and for the three months ended March 31, 2013.

Interest income on loans increased $123,000, or 5.0%, to $2.6 million for the three months ended March 31, 2014 from $2.4 million for the three months ended March 31, 2013. The average yields on loans decreased to 5.23% for the three months ended March 31, 2014, compared to 5.57% for the three months ended March 31, 2013. Interest income on investment securities increased $49,000, or 10.5%, to $516,000 for the three months ended March 31, 2014 from $467,000 for the three months ended March 31, 2013, reflecting a decrease in the average balance of such securities to $85.0 million at March 31, 2014 from $97.0 million at March 31, 2013. The average yield on securities increased to 2.43% for the three months ended March 31, 2014, compared to 1.93% for the three months ended March 31, 2013.

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Interest Expense.Interest expense decreased $143,000, or 25.2%, to $452,000 for the three months ended March 31, 2014 from $595,000 for the three months ended March 31, 2013. The decrease reflected a decrease in the average interest rate paid on deposits to .66% for the three months ended March 31, 2014 from 0.85% for the three months ended March 31, 2013, as well as decreases in the average balance of such deposits from $225.8 million to $216.5 million for the same periods. Interest expense on Federal Home Loan Bank Advances and other borrowings decreased $23,000 or 19.7% to $94,000 for the three months ended March 31, 2014 from $117,000 for the three months ended March 31, 2013. This decrease was due to a 150 basis point decrease in the average rate paid on these borrowings offset by an increase of $9.9 million in the average balance of these borrowings.

Interest expense on certificates of deposit decreased $109,000, or 25.4%, to $320,000 for the three months ended March 31, 2014 from $429,000 for the three months ended March 31, 2013. This decrease reflected a decrease in the average rate paid on certificates of deposits to 1.00% for the three months ended March 31, 2014 from 1.23% for the three months ended March 31, 2013, as well as a decrease in the average balance of such certificates to $127.4 million from $139.6 million. Interest expense on money market deposits, savings, and NOW and demand deposits decreased $11,000, or 22.4%, to $38,000 for the three months ended March 31, 2014 from $49,000 for the three months ended March 31, 2013. The decrease was due to a decrease of 6 basis points in average rates paid on the NOW and demand deposits as well as savings and money market accounts to 0.17% for the three months ended March 31, 2014 from .23% for the three months ended March 31, 2013, offset by an increase in the average balance of such deposits to $89.0 million from $86.2 million.

Net Interest Income. Net interest income increased $311,000, or 13.2%, to $2.7 million for the three months ended March 31, 2014 from $2.4 million for the three months ended March 31, 2013. The interest rate spread increased to 3.51% from 3.02%, offset by a slight decrease in the ratio of our average interest earning assets to average interest bearing liabilities to 120.6% from 121.7%. Our net interest margin increased to 3.64% from 3.19%. The increase in our interest rate spread and net interest margin were largely due to an increase on interest earned on securities and a decrease in interest paid on deposits and other borrowings.

Provision for Loan Losses. We recorded no provision for loan losses for the three months ended March 31, 2014 and $99,000 for the three months ended March 31, 2013. The provisions for each period were based on management’s quarterly calculations and reflect the minimal levels of nonperforming loans and charge-offs during the periods.

Noninterest Income. Noninterest income decreased $80,000 or 1.98%, to $325,000 for the three months ended March 31, 2014 from $405,000 for the three months ended March 31, 2013. The decrease in noninterest income was primarily attributable a decrease of net gains on mortgage banking activities of $128,000 for the three months ended March 31, 2013 to $94,000 from $222,000 for the three months ended March 31, 2013, offset by an increase in service charges on deposits to $154,000 for the three months ended March 31, 2014 from $129,000 for the three months ended March 31, 2013. The decrease in net gains on mortgage banking activities was due to a decrease in origination of loans for sale, particularly refinancing loans. An increase in interest rates and continued decline in refinancing activity in future periods may further decrease our gains in mortgage banking activities.

Noninterest Expense. Noninterest expense increased $1.5 million, or 75.0%, to $3.6 million for the three months ended March 31, 2014. This increase was due largely to an increase in salaries and employee benefits of $467,000 due to an increase in the number of employees as well as the expense related to the grants of options and stock awards under our stock based compensation plans during April and May of 2013, an increase in professional fees related to the acquisition of Town Square Financial Corporation and a proxy contest conducted by a dissident stockholder, and the data processing termination fee of $877,000 associated with the Town Square acquisition.

Income Tax Expense.The provision for income tax benefit was $154,000 for the three months ended March 31, 2014, compared to an income tax expense of $172,000 for the three months ended March 31, 2013. Our effective tax rates for the three months ended March 31, 2014 and 2013 were 26.6% and 27.8%, respectively. This decrease in income tax expense and effective tax rate is due to sustaining a net operating loss for the three months ended March 31, 2014.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Disclosures of quantitative and qualitative market risk are not required by smaller reporting companies, such as the Registrant.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by the report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter endedMarch 31, 2014, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company and its subsidiaries are subject to various legal actions that are considered ordinary routine litigation incidental to the business of the Company, and no claim for money damages exceeds ten percent of the Company’s consolidated assets. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s results of operations.

ITEM 1A. RISK FACTORS

Disclosures of risk factors are not required by smaller reporting companies, such as the Company.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Index to Exhibits” immediately following the Signatures.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Poage Bankshares, Inc.

Date: May 15, 2014

/s/R. E. Coffman, Jr.

R. E. Coffman, Jr.

President  & Chief Executive Officer

/s/Jane Gilkerson

Jane Gilkerson

Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit
number	Description
31.1	Certification of R. E. Coffman, Jr., President, and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15-d-14(a).
31.2	Certification of Jane Gilkerson, Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1	Certification of R. E. Coffman, Jr., President and Chief Executive Officer, and Jane Gilkerson, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following material from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL (Extensible Business Reporting Language) :(i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Other Comprehensive Income (Loss), (iv) Consolidated Statements of Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to the Consolidated Financial Statements.

33